What is Consequential Damages?

Consequential damages are losses caused by the downstream effects of a breach, rather than by the breach itself. They arise through a chain of circumstances that links the breach to a broader commercial impact.

Typical categories include: lost profits (revenue you did not earn because a supplier failed to perform), production losses (when a machine or system goes down because of a defective component), reputational harm (customer losses caused by a poorly functioning system), and third-party losses (damages your customers suffer because of your supplier's failure).

Of all contractual exclusions, the exclusion of consequential damages is economically the most significant. When an IT system fails due to a software defect, the direct damages — remediation costs — may be relatively contained. The consequential damages — lost revenue, operational disruption, customer attrition — can be many times larger.

The classification of a loss as direct or consequential is not always straightforward. Lost profits, for instance, are treated as direct damages in some legal systems and as consequential damages in others. This ambiguity makes the liability clause one of the most critical and most litigated provisions in B2B contracts.

Some contracts do not exclude consequential damages entirely but instead place a cap on them. This is often a reasonable compromise: the supplier is protected from unlimited exposure while the buyer retains a partial recovery right for indirect harm.

The exclusion of consequential damages is in most cases legally valid and commercially significant. When a supplier fails seriously and the business impact exceeds the contract value, the consequential damages exclusion is the defence that limits the supplier's exposure.

For SMBs dependent on critical systems or services — IT infrastructure, logistics, energy — it is worth negotiating partial consequential damages coverage, or raising the liability cap, for contracts where a failure could cause disproportionate harm. Also consider whether the risk can be covered by business interruption or professional indemnity insurance.